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Morningstar | United Breweries Posts Strong 4Q Volume Growth Despite Currency Headwinds; Shares Fairly Valued

We aren't anticipating substantial changes to our $25 per ADR fair value estimate for narrow-moat United Breweries after evaluating its fourth-quarter results. On a full-year basis, sales grew 5% (comparable to our estimate) and adjusted operating margin expanded 110 basis points to 14.9% (versus our expectation that it would stay flat). This improvement in profitability was largely driven by the firm's ongoing cost savings initiatives as well as improved scale and better leveraged logistics expenses due to substantial volume expansion in the international segment (27% of sales, 23% full-year volume growth). In our view, the company's efforts to extract efficiencies from its operations should help it weather volatile commodity costs over the near term (higher costs for aluminum and PET were partly offset by lower sugar costs in Chile). We're reiterating our longer-term outlook, which calls for around 6% sales growth and above 15% operating margin on average over our forecast.

Fourth-quarter volume growth of 12% was driven by United Breweries' core Chilean market (62% of sales, volumes up 9%) and international segment (volumes up 20% in the fourth quarter), though average pricing in both markets softened, with net sales per hectoliter declining by a 3% and 8%, respectively, due to an unfavorable mix shift and promotional activity in Chile as well as strong currency headwinds in Argentina (management estimates the Argentine Peso depreciated 99% relative to the Chilean Peso). However, we still expect low-single-digit improvements in consolidated pricing longer term, as it ramps up its revenue management efforts (aiming to at least increase prices in line with inflation in markets like Uruguay and Paraguay) and benefits from premiumization trends in the beer market.

We were pleased to see recovery in the wine business (11% of sales), which posted 11% fourth-quarter revenue growth that was lifted by a nearly 10% improvement in net sales per hectoliter, thanks to strengthened domestic pricing as well as the benefit of a stronger U.S. dollar on export revenue. These factors, coupled with lower input costs (2018 wine harvest yields returned to normalized levels, following a weak harvest in Chile in the year prior) also helped segment gross margin expand 310 basis points to 38.4%.